Note on Effect of Denom Level on Absorption statement

Note on Effect of Denom Level on Absorption statement -...

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Effect of Using A Denominator Level for Calculating Fixed Overhead per unit for Absorption Costing The calculation of the fixed mfg overhead rate is usually based on estimates made at the beginning of the year. Budgeted Mfg Ohd rate = Estimated Fixed Ohd in $ Estimated units of activity In standard cost systems, the estimated units of activity is the denominator level and is some measure of production volume such as plant capacity, ‘normal volume’, master budget volume, etc. Whenever the actual production volume is different from the denominator volume , then there will be a volume variance, calculated in diagram form as follows: Budgeted Denom. Level X Fixed Ohd rate = Fixed Ohd Actual production X Fixed Ohd rate = Applied Fixed Ohd Volume Variance If the actual production level is > the denominator level, the volume variance will be favourable. If actual production is < the denominator level, the volume
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Unformatted text preview: variance will be unfavourable (because of assumed lost sales, loss CM, and lost income.). The volume variance is treated as an adjustment to COGS. That is, a favourable volume variance will reduce COGS and an unfavourable variance will increase COGS. The statement presentation is as follows: COGS at standard $ xxx Volume variance xx COGS at actual $ xxx The change is only made to the Absorption format income statement because there is no volume variance in Variable Costing (because volume variances relate only to fixed overhead and fixed overhead is not charged to inventory under Variable Costing.) The volume variance has no effect on details of the reconciliation between the two incomes. However, when there is a denominator level, calculate the volume variance and adjust the COGS amount on the absorption income statement. RF12/05...
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This note was uploaded on 03/03/2012 for the course ACCT 2460 taught by Professor Farrar during the Winter '12 term at Conestoga.

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